Counterfeiting is a problem that is not unique to licensors. Licensees are harmed as well. While they are paying a royalty to a licensor for the right to use the property in question, the counterfeiter gets a free ride. Moreover, the counterfeiter is not bound by the quality control requirements imposed by the licensor, and frequently, not the social responsibility limitations imposed by a licensor or retailer. That allows them to significantly undercut the price of the resultant product and eventually erode the licensee’s sales of legitimate licensed products.
The drill for every property owner is to take appropriate steps to protect its property – be aware of what is happening in the marketplace, and if the licensor discovers that his property has become attractive to counterfeiters, he has to take prompt and aggressive actions. In the licensing industry, the reality of life is that licensees are usually closest to the problem since they are the ones who are actually in the marketplace facing competition from unlicensed products every day. As such, property owners can be assured that their licensees will quickly bring these issues to their attention as soon as they occur.
Counterfeiting defined
Counterfeiting is the deliberate use of another’s intellectual property, eg, trademarks, product designs and copyrights, including the use of a false trademark that is identical to or substantially indistinguishable from a registered trademark. It can also constitute the passing off of a product whose design is similar or identical to the design of the authentic product or the act of copyright piracy where an audio-visual work is copied and distributed on an unauthorised basis.
It should be appreciated that counterfeiting is not simply the infringement of another’s intellectual property rights. It is the blatant duplication of such property with the intent to have consumers believe that their product was an original, even though it is being sold at a small fraction of the original.
To be successful in this battle, property owners must try to stay ahead of infringers and counterfeiters. Unfortunately, it can be a full time job, and in most instances, will require aggressive action. Because of the profit potential that counterfeiting offers, counterfeiters have become very good at their trade, and unless property owners take swift, aggressive action, the problem will only escalate.
A property owner, who believes that it can simply kick back and let its licensees fend for themselves against unlicensed (and non-royalty paying) competition, will soon have a few, if any, royalty paying licensees. Protecting the licensees’ right to sell competition-free (particularly competition that is not being burdened by having to pay royalties and don’t pay any taxes) is one of the obligations of a licensor, and a prime reason why a licensee is willing to pay for the right to use a licensed property. Successful licensors understand that very basic issue.
Extent of the problem
How big a problem is counterfeiting? It’s huge and sadly it’s growing despite the best efforts of property owners and governments around the world to try to stem the tide. The reason for its growth is simple – it’s extraordinarily lucrative for the counterfeiter. They have the ability to sell a massive amount of product without having to spend anything to design or test the product; pay the property owner a royalty for the right to use another’s property; or pay any taxes.
The counterfeiter simply skips to the last two steps in the process. It knocks-off the product using less expensive material (and labour) and sells it for a fraction of the price charged by licensed manufacturers, typically through less than reputable channels of distribution.
The overall problem is getting worse. For example, in 2008, the US Customs and Border Protection (CBP) and US Immigration and Customs Enforcement (ICE) announced the seizure of more than $272.7 million of counterfeit and pirated goods, which represented a 38% increase over the previous year. More significantly, it represented almost a 300% increase since 2002.
The most frequently seized product was footwear, which accounted for 38% of the total seizures. Ninety-eight per cent of counterfeit footwear originated in China which is, by far, the leading source of all counterfeit merchandise. Counterfeit products from China, India and Hong Kong constituted about 94% of all counterfeit product seized by ICE over the same period.
The United States is not the only country having a problem with counterfeit merchandise. In 2008, 178 million counterfeit items were seized by European Customs authorities, up 79 million from 2007. Forty-four per cent of all products seized were pirated CDs and DVDs; 23% were counterfeit cigarettes; and 10% were articles of counterfeit clothing. Of all counterfeit goods seized, 54% originated from China, although a majority of the seized counterfeit food and beverage products came from Indonesia and most of the counterfeit pharmaceuticals came from India.
The victims
Counterfeiting is not, as some believe, a victimless crime – it harms both the property owner and the consumer. Counterfeiting steals the identity and goodwill developed by the property owner over decades of use and robs the consumer of the comfort and reliability that he has when he buys an otherwise branded product. More importantly, it can pose a danger to consumer, particularly if the counterfeit product is not manufactured up to the quality levels of the genuine product.
It also creates confusion on the consumer’s part between the genuine product and the counterfeit product and may destroy the consumer’s confidence in a particular brand, often making them believe that the poorly manufactured, counterfeit product is actually the genuine item.
Counterfeiting causes economic damage to all involved in the process. It deprives municipalities, states and countries of tax revenues derived from the sale of genuine products, not to mention the revenues that would have been received by the property owners and its licensees from the sale of genuine products.
The authors are Co-Founder and Managing Partner, Grimes and Battersby, LLC. Established in 1980, Grimes & Battersby,
LLC has become one of the leading intellectual property law firms in the world.
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